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Loan rates for the average customer are unlikely to come down immediately, despite the Reserve Bank of India (RBI) reducing its benchmark policy rate earlier this month.

At a meeting held at the RBI headquarters in Mumbai on Thursday, the central bank Governor Shaktikanta Das appealed to bankers to pass on lower lending rates to end customers, but bankers did not give any firm commitments.

According to two bankers in the know, the regulator pointed out that the monetary policy committee (MPC) had reduced the repo rate by 25 basis points (bps) to 6.25 percent in the February review. However, apart from a 5 bps cut on home loan rates by State Bank of India (SBI), no other lender had tweaked its lending rates.

In response, bankers pointed out that the deposit rates are already low and it would be difficult for banks to bring down these rates further. Deposit growth, which is trailing below loan growth, also prevents banks from cutting deposit rates further. High rates on small savings products adds to the stickiness of deposit rates. On Thursday, the Employees’ Provident Fund Organisation (EPFO) hiked the interest rates by 10 bps to 8.65 percent for the year 2018-19.

Unless banks cut deposit rates, which in turn reduces their cost of funds, loan rates do not fall. At present, banks use the marginal cost lending rate (MCLR) formula to determine loan rates.

The median one-year marginal cost based lending rate (MCLR) for all scheduled commercial banks in January stood at 8.8 percent, according to monthly data released by the RBI. For public sector banks, the median one-year MCLR was at 8.75 percent, for private banks it was at 9.3 percent, and foreign banks had a one-year rate of 8.65 percent.

In December 2018, the RBI had asked banks to link all new floating rate retail loans to an external benchmark by April 2019, to better reflect interest rate changes in the economy.

Banks, particularly public sector lenders, have been lobbying against linking retail loans to an external benchmark, as they believe that it could lead to significant volatility on lending rates. In a representation to the RBI Governor, bankers had noted that external benchmarks could be introduced for corporate loans. Das had asked bankers to appeal to RBI Deputy Governor, NS Vishwanathan.

While announcing the February 2019 monetary policy review, Das had said that it is still assessing feedback it has received from banks. He, however, did not confirm whether the rule would be implemented starting April. Linking loan rates to an external benchmark would quicken transmission since customers would no longer need to wait for a change in the cost of funds of banks before they see their lending rates adjust to policy changes. To be sure, this would be the case with a downward and an upward movement in rates.